Shorting Oil, Hedging Tesla

[jhm]

Government Agency Warns Global Oil Industry Is on the Brink of a Meltdown - VICE

This is an interesting. The Finns are making arguments very similar to mine. Specifically, that oil is getting to a place where there is no price that is low enough to keep demand growing yet high enough to keep production growing. The authors recognize that the peak my have already happened. But the real kicker is that we need to transition quickly past fossil fuels sustain growth in the global economy.

There is no longer a choice between saving the climate and saving the economy. We need a rapid transition to renewables and EV to save both.

 

[TheTalkingMule]

So

So, I just purchased a few XOM Put contracts expiring in 2022. While it’s a tiny fraction of our portfolio, this is my first time directly “betting” against the stock of a fossil fuel company. It’ll be interesting to see how this goes!

I'm gonna see if coronavirus fades and we get a big rebound to Oct/Nov levels on these big oil players then buy some long puts as well. Chevron 2022's looked cheap even now, by March they could be sweet and June 2022's may even be available.

 

[Destiny1701]

Government Agency Warns Global Oil Industry Is on the Brink of a Meltdown - VICE

This is an interesting. The Finns are making arguments very similar to mine. Specifically, that oil is getting to a place where there is no price that is low enough to keep demand growing yet high enough to keep production growing. The authors recognize that the peak my have already happened. But the real kicker is that we need to transition quickly past fossil fuels sustain growth in the global economy.

There is no longer a choice between saving the climate and saving the economy. We need a rapid transition to renewables and EV to save both.

Couldn’t agree more. Except these same articles were came about when oil hit $28 back in 2016.
The world was saying ‘oils days were over’. Here we were at the end of 2019 at around $70. Production manipulation surely however US shale growth has literally counter balanced opec’s reductions. The world oil is still as awash in oil as it was in 2016. What’s changed?

There are numerous countries in the world (2nd and 3rd) who do not have the technical advancements to ever consider a shift to a renewables type economy. China and India have a voracious appetites for oil and it won’t change anytime soon unfortunately as they have combined 2.5B mouths to feed. Their entire energy infrastructure is built around fossil fuels and their imports have only accelerated and will continue to in order to feed their populations and economy. Their transition to renewable energy is not as prevalent as in NAmerica or other G7 countries.

Basically it’s like asking GM/Ford to end producing gas cars and go all in on EV. Their company would collapse tomorrow. A gradual transition required. Eventually demand will will pique agreed.

I do believe it still has some room to grow in other countries as their populations continue to grow at heavy growth rates....not so much G7 as our technology has allowed us to advance in energy renewables and non- fossil based exploitation and our population growth is predictably stable. But let’s not forget the rest of the world is not on the same timeline.

 

[willow_hiller]

A gradual transition required

A well reasoned assessment. I guess my question to you is: will they necessarily have a choice to make a gradual transition?

Can the BRICS alone sustain the global oil industry, or will decline happen regardless of their economic wishes when the bottom falls out of demand in the G7? And knowing these risks, won't it be rational for middle-income countries and Ford to bite the bullet now and make the painful transition to avoid collapse? Or will they ride the sunk-cost fallacy into oblivion?

 

[replicant]

There are numerous countries in the world (2nd and 3rd) who do not have the technical advancements to ever consider a shift to a renewables type economy.

Really? The rest of the world will get EV and renewable quickly, just like they prefer switching to 4G/5G Internet as opposed to first cable all the houses with fiber.

Basically it’s like asking GM/Ford to end producing gas cars and go all in on EV. Their company would collapse tomorrow. A gradual transition required. Eventually demand will will pique agreed.

Sure, like Nokia and BlackBerry "required" a gradual transition to touch smartphones… These companies won't be the decision makers for long.

As soon as they start to go bankrupt (people delaying the replacement of their cars as they wait for better EV), governments will either bail them out in exchange of forcing them to a non-gradual transition. Or governments will let other companies (e.g Amazon, Google, Apple, etc) take control of failing manufacturers to buy them out for cheap to try and force them to go full EV quickly, in the hope of distributing their AV tech and infotainment as broadly as possible (remember Google buying and selling Motorola in months, to get some cheap patents and further push a pure Android play…).

 

[Doggydogworld]

Government Agency Warns Global Oil Industry Is on the Brink of a Meltdown - VICE

This is an interesting. The Finns are making arguments very similar to mine. Specifically, that oil is getting to a place where there is no price that is low enough to keep demand growing yet high enough to keep production growing. The authors recognize that the peak my have already happened. But the real kicker is that we need to transition quickly past fossil fuels sustain growth in the global economy.

There is no longer a choice between saving the climate and saving the economy. We need a rapid transition to renewables and EV to save both.

Geez. Peaking of conventional oil caused the 2008 financial crisis? A nutty mish-mash of peak oil and Austrian economics.

EVs cannot cause oil demand to decline this year, or next or the year after. Robotaxis could do it by 2022-23 if they followed a Tony Seba/ARK adoption curve, but that looks to be a fantasy. Pandemic and/or economic meltdown can reduce oil demand, but if either lasts 5+ years then we've got bigger problems than oil.

Oil fields aren't like factories, their production declines naturally. So even when oil demand peaks, the very gradual decline as ICE cars age out of the fleet will not create excess capacity. Operators with too much debt will restructure in bankruptcy court and continue operating as normal.

EV unit growth was ~5% last year. It'll be 0-15% this year. Even if EV growth returns to 40%+, the ICE fleet will continue to grow until ~2027. That math is straightforward. Maybe hybrids improve ICE fleet efficiency enough to pull peak oil demand forward a bit, but the trend to SUVs is pushing the opposite direction.

None of this means oil companies are a good investment. The market looks forward and stock price declines dramatically when a company transitions into liquidation.

 

[jhm]

A well reasoned assessment. I guess my question to you is: will they necessarily have a choice to make a gradual transition?

Can the BRICS alone sustain the global oil industry, or will decline happen regardless of their economic wishes when the bottom falls out of demand in the G7? And knowing these risks, won't it be rational for middle-income countries and Ford to bite the bullet now and make the painful transition to avoid collapse? Or will they ride the sunk-cost fallacy into oblivion?

No, it's the OECD that runs the risk of rising sunk-cost fallacy into oblivion. Developing countries will actually make the shift faster because growth rates are higher.

 

[jhm]

Geez. Peaking of conventional oil caused the 2008 financial crisis? A nutty mish-mash of peak oil and Austrian economics.

EVs cannot cause oil demand to decline this year, or next or the year after. Robotaxis could do it by 2022-23 if they followed a Tony Seba/ARK adoption curve, but that looks to be a fantasy. Pandemic and/or economic meltdown can reduce oil demand, but if either lasts 5+ years then we've got bigger problems than oil.

Oil fields aren't like factories, their production declines naturally. So even when oil demand peaks, the very gradual decline as ICE cars age out of the fleet will not create excess capacity. Operators with too much debt will restructure in bankruptcy court and continue operating as normal.

EV unit growth was ~5% last year. It'll be 0-15% this year. Even if EV growth returns to 40%+, the ICE fleet will continue to grow until ~2027. That math is straightforward. Maybe hybrids improve ICE fleet efficiency enough to pull peak oil demand forward a bit, but the trend to SUVs is pushing the opposite direction.

None of this means oil companies are a good investment. The market looks forward and stock price declines dramatically when a company transitions into liquidation.

I think you're missing the distinction between price and volume. You're fair making points about the volume of consumption or displacement. But it you are making investments into fossil fuel projects, the critical questions are around the price of fuel. It doesn't matter what volume of fuels the world consumes, what matters for your projects is if prices will be high enough to get a solid ROI. The level of investment in new projects across the industry can collapse quite rapidly when everyone expects to lose money. Many assets have value linked to the investment level. For example, suppose you have specialized ship for subsea drilling. Those became nearly worthless in 2014-15. Recently one of those was sold for scrap metal. So that's just one little example. The whole E&P space gets crushed when investment levels fall. And a lot of economic activity slows. So many years before we hit a volume peak in consumption, the economics can turn quite sour.

You might want to take a look at what is presently happening with LNG. There has been massive investment in the whole LNG supply chain, but now the price in Asia is $3/mmBtu and Europe is running out of storage capacity for all the diverted excess supply. This is economically very painful for a lot of investors. Does it mean consumption of LNG has peaked volumetrically? Probably not yet. But it might well be that the market size of LNG measured in gross revenue has peaked, and that could lead to substantial asset impairment, aka stranded assets.

There is actually a huge misunderstanding in the general public about what stranded assets mean. People generally think of it as assets that will cease to be used. But there is more to it than that. Suppose you buy an oil well. The present value of that well is the discounted cash flow from operating that well until it runs dry. That present value calculation depends on future oil prices. If oil futures were to decline, your present value of what's left in the well would also fall, even if you continue to produce just as much in either pricing scenario. This loss of value is asset impairment. Your well which has lost value is a stranded asset, even if it continues to fulfill all volume production expectations.

All natural decline rate assumptions are baked into the value of the asset before it is impaired. The natural decline rate does not really protect any investor from asset impairment. It is misleading to suggest that natural decline rates are some sort of hedge against stranded assets. Those decline rates are well understood and already baked into a huge chain of investments. It's when assets lose value unexpectedly and systemically that everything goes haywire, and declining fuel prices are exactly what can cascade systemic asset deflation.

 

[Oil4AsphaultOnly]

Geez. Peaking of conventional oil caused the 2008 financial crisis? A nutty mish-mash of peak oil and Austrian economics.

EVs cannot cause oil demand to decline this year, or next or the year after. Robotaxis could do it by 2022-23 if they followed a Tony Seba/ARK adoption curve, but that looks to be a fantasy. Pandemic and/or economic meltdown can reduce oil demand, but if either lasts 5+ years then we've got bigger problems than oil.

Oil fields aren't like factories, their production declines naturally. So even when oil demand peaks, the very gradual decline as ICE cars age out of the fleet will not create excess capacity. Operators with too much debt will restructure in bankruptcy court and continue operating as normal.

EV unit growth was ~5% last year. It'll be 0-15% this year. Even if EV growth returns to 40%+, the ICE fleet will continue to grow until ~2027. That math is straightforward. Maybe hybrids improve ICE fleet efficiency enough to pull peak oil demand forward a bit, but the trend to SUVs is pushing the opposite direction.

None of this means oil companies are a good investment. The market looks forward and stock price declines dramatically when a company transitions into liquidation.

"peeking of conventional oil caused the 2008 financial crisis" ... agree that it was far-fetched, but to jump from that to saying that EV's cannot cause oil demand to decline next year or the year after is throwing out the baby with the bath water.

Here's the oil consumption data for the past 4 years:

- The US consumed more oil than any other country, including China, and it's consumption is starting to plateau/decline.
- All other countries (except India/China) have either plateaued/declined or are too little to matter.
- China's consumption grew by less than 500kbpd each year, with 2020 starting off with a "great" start! /s
- China had a mandate of 10% ZEV credits in 2019, and 12% for 2020. This mandate just got started in 2018 and will impact their oil consumption growth (probably stays at 500kbpd if not lower).
- India's consumption grew by 200kbpd (or less) each year.
- EIA is forecasting a consumption increase of 1.3mbpd in 2020, despite 2019 only increasing by 0.8mbpd. Production is forecast to increase in anticipation of the projected increase in consumption (which is looking like it won't materialize).

At best, we'll maybe get 700kbpd increase in oil consumption. Regardless of how many cars there are sold (which are offset by the number of cars scrapped in the developed economies), the oil consumption growth is starting to plateau, and EV's will have an effect, because they are most likely to replace the high-consumption personal vehicles first. BYD's buses and dryage trucks are directly impacting consumption on the short-haul and mass transit side of things. The world of EV's isn't just Tesla.

On another note, SCO (ultrashort crude oil futures) is now at ~$17. I hope to see $30/share before selling!

 

[jhm]

2012 very well could prove to be the peak real revenue year for crude production.

 

[jhm]

View attachment 508695
2012 very well could prove to be the peak real revenue year for crude production.

BTW, this chart also suggests how high oil prices were a contributing factor to the recession in 2008. Notice this huge surge in real crude revenues from 2007 to 2008. This incremental cost for fuel cut into labor productivity, resulting in poor job markets in most parts of the world. A weak job market made it harder for families to afford new houses or even pay existing mortgages. And so on, the global economy fell into recession.

Central banks found it necessary to lower interest rates and inject massive cash into the economy. This easy money fueled US shale and the rest of the oil industry. The boost in production allowed consumption to rise. High fuel prices were also sustained from 2011 to 2014. This fueled US shale production even further plunging the oil market into the glut of 2015.

Ordinarily, the economy would have been able to sustain the high oil prices near the peak in 2012. I suspect that quantitative easing, bolstering economic demand, was the basic life support that made this possible for four years. High oil prices are not economically sustainable, even if they produce a surplus of fuel. The glut was one consequence of how this is not sustainable.

A healthy economy needs cheap oil. If central banks must flood the economy with cash to obtain cheap oil, this is a really precarious option. Fortunately, we now have RE, EVs and other technologies to help displace demand for oil. Increasingly the global economy is becoming less dependent on oil and less at risk for an oil shock, where high oil prices destroy economic demand. With adequate alternatives, high oil prices should only kill demand specifically for oil and not everything else in the economy.

 

[jhm]

Peak Shale Will Send Oil Prices Sky High | OilPrice.com

This write up may help us better understand the recent report from Finland. Apparently that author, a geologist does not think much of peak demand. He is strictly concerned with the supply side. He identifies $100/b as the price at which the global economy cannot sustain GDP growth, and $45/b as the price producers require to sustain production growth. So he is envisioning a world in which the price producers require climbs all the way up to the price that kills the economy. This is basic peak supply theory. What he is missing is that due to price elasticity of demand and alternatives such as EVs and RE, there is another threshold at which specific demand for oil cannot sustain growth. I think this is near $80/b and is falling as EVs and RE come down in price. (This threshold must be lower than the price level that puts the economy into recession, since that would entail reducing demand for oil.) The critical point is that as the price of oil approaches the price that kill oil demand, it halts further increases to the price that kills the economy. In the short run, both thresholds can be breached, but this would not be sustained. So I would not put much weight on the oil supply crisis scenario he envisions.

That's not to say that supply factors are not important. They are important for pushing us closer to the demand peak. Once the price required to sustain production reaches the price needed to sustain consumption, neither can be sustained.

 

[RobStark]

Traders Scramble To Find Oil Buyers Amid Falling Chinese Demand | OilPrice.com

 

[TheTalkingMule]

On another note, SCO (ultrashort crude oil futures) is now at ~$17. I hope to see $30/share before selling!

How long of a duration do you buy & hold SCO. My understanding was you can't really sit on it for weeks because of the way the contract buying is done to get all that leverage.

 

[Oil4AsphaultOnly]

How long of a duration do you buy & hold SCO. My understanding was you can't really sit on it for weeks because of the way the contract buying is done to get all that leverage.

I have been trading them for almost two years. Selling put options got me my first shares at $30! And had held them since with occasionally selling call options around $30 strike. One of my worst trades, which is why I'm dumping them. At least the swings between $11 and $30 have been gradual (over 6 months!).

I'm not a good trader.

 

[Doggydogworld]

- The US consumed more oil than any other country, including China, and it's consumption is starting to plateau/decline.

US consumption has been almost flat for 20+ years (~0.5%/year). Dial your table back to 1997 and see. There is no "starting to plateau/decline" trend, just minor cyclical bobbles. Europe has been flat since 1997 and Japan has declined. As a group OECD has been dead flat since 1997.

Meanwhile non-OECD doubled from 26m to 53m bpd since 1997. These are very long term trends that have nothing to do with EVs.

- China's consumption grew by less than 500kbpd each year, with 2020 starting off with a "great" start! /s
- China had a mandate of 10% ZEV credits in 2019, and 12% for 2020. This mandate just got started in 2018 and will impact their oil consumption growth (probably stays at 500kbpd if not lower).

China grew ~500kbpd annually since 1997. Again, it's a long term trend. A long range BEV can earn 6 credits, so the 12% mandate requires less than 500k BEVs or roughly 1m of a BEV/PHEV mix (note: the rules change often, so these numbers may be a little off). Meanwhile China adds ~25m ICE to their fleet each year and only scraps ~5m (note: the rule on reselling parts was changed after this article was written). We are a long way from EVs having a material impact on Chinese demand growth. Demographics will play a bigger role the next five years.

- India's consumption grew by 200kbpd (or less) each year.
- All other countries (except India/China) have either plateaued/declined or are too little to matter.

India, the MId-East, Central/South America, Africa and Russia together added ~15m bpd (more than China's 11m) over the past 22 years. Growth stalled out in the Mideast and Central/South America in 2014 when the shale boom crashed oil prices, but continues elsewhere. I'd put the current non-OECD trend at 450k China + 450k ROW = 900kbpd annually, down from 1.2m or so before the shale boom.

Long term trends are often overshadowed by blips like the great financial crisis and possibly Coronovirus. But the trends are remarkably resilient. It will take a lot more than 2m EVs per year to reverse course. I figure it'll take 20-25m/year. Or ~5m/year EV Robotaxis. But for now the global ICE fleet keeps growing 40-50m cars per year.

- EIA is forecasting a consumption increase of 1.3mbpd in 2020, despite 2019 only increasing by 0.8mbpd.

I use EIA (and IEA, BP, etc.) data quite a bit. I pay little attention to their forecasts.

...the oil consumption growth is starting to plateau

"Starting to plateau" is a long way from "peaking this year".

Oil peak is a lot like 1999's "bricks and mortar are dead". Right trend, wrong timing.

 

[mspohr]

US consumption has been almost flat for 20+ years (~0.5%/year). Dial your table back to 1997 and see. There is no "starting to plateau/decline" trend, just minor cyclical bobbles. Europe has been flat since 1997 and Japan has declined. As a group OECD has been dead flat since 1997.

Meanwhile non-OECD doubled from 26m to 53m bpd since 1997. These are very long term trends that have nothing to do with EVs.

China grew ~500kbpd annually since 1997. Again, it's a long term trend. A long range BEV can earn 6 credits, so the 12% mandate requires less than 500k BEVs or roughly 1m of a BEV/PHEV mix (note: the rules change often, so these numbers may be a little off). Meanwhile China adds ~25m ICE to their fleet each year and only scraps ~5m (note: the rule on reselling parts was changed after this article was written). We are a long way from EVs having a material impact on Chinese demand growth. Demographics will play a bigger role the next five years.

India, the MId-East, Central/South America, Africa and Russia together added ~15m bpd (more than China's 11m) over the past 22 years. Growth stalled out in the Mideast and Central/South America in 2014 when the shale boom crashed oil prices, but continues elsewhere. I'd put the current non-OECD trend at 450k China + 450k ROW = 900kbpd annually, down from 1.2m or so before the shale boom.

Long term trends are often overshadowed by blips like the great financial crisis and possibly Coronovirus. But the trends are remarkably resilient. It will take a lot more than 2m EVs per year to reverse course. I figure it'll take 20-25m/year. Or ~5m/year EV Robotaxis. But for now the global ICE fleet keeps growing 40-50m cars per year.

I use EIA (and IEA, BP, etc.) data quite a bit. I pay little attention to their forecasts.

"Starting to plateau" is a long way from "peaking this year".

Oil peak is a lot like 1999's "bricks and mortar are dead". Right trend, wrong timing.

Of course, absolute consumption "almost flat for 20+ years" is a significant per capita or per GDP decline.

 

[jhm]

The End Of The Oil Price Boom And Bust Cycle | OilPrice.com

This is interesting, but fails to explain why cyclic behavior may be breaking down. There are a few interesting tidbits.

Considered a much cleaner fuel than oil and its derivatives, gas is largely replacing coal used for energy generation, but it is also replacing coal and oil used in heavy industry. It is this replacement that is ushering in this golden age of gas because heavy industry is a much bigger consumer of coal and oil than the power generation industry.

Gas, in short, is displacing oil from one of its top demand areas.

This is interesting because our discussions here have not spent much time looking at how gas and gas liquids are displacing demand for crude. certainly most of petrochem can draw from gas and NGL feed stock. But I was not aware that much petroleum was still being used for industrial heat. And of course a few percent of oil goes to power generation. So gas can keep displacing a wide spectrum of demand for crude. Renewable energy especially with supporting tech like heat pumps, batteries, and electrolyzers can also get in on this action. But for now gas is super cheap, and the LNG market is saturated. So there's a lot of cheap gas looking for some place to go. Wherever it can undercut crude, it will erode demand, pulling oil prices down and displacing volume.

One would expect that OECD countries would tend to have better developed gas infrastructure than developing countries. Perhaps this is one reason why oil demand has plateaued in the OECD.

 

[Oil4AsphaultOnly]

US consumption has been almost flat for 20+ years (~0.5%/year). Dial your table back to 1997 and see. There is no "starting to plateau/decline" trend, just minor cyclical bobbles. Europe has been flat since 1997 and Japan has declined. As a group OECD has been dead flat since 1997.

Meanwhile non-OECD doubled from 26m to 53m bpd since 1997. These are very long term trends that have nothing to do with EVs.

China grew ~500kbpd annually since 1997. Again, it's a long term trend. A long range BEV can earn 6 credits, so the 12% mandate requires less than 500k BEVs or roughly 1m of a BEV/PHEV mix (note: the rules change often, so these numbers may be a little off). Meanwhile China adds ~25m ICE to their fleet each year and only scraps ~5m (note: the rule on reselling parts was changed after this article was written). We are a long way from EVs having a material impact on Chinese demand growth. Demographics will play a bigger role the next five years.

India, the MId-East, Central/South America, Africa and Russia together added ~15m bpd (more than China's 11m) over the past 22 years. Growth stalled out in the Mideast and Central/South America in 2014 when the shale boom crashed oil prices, but continues elsewhere. I'd put the current non-OECD trend at 450k China + 450k ROW = 900kbpd annually, down from 1.2m or so before the shale boom.

Long term trends are often overshadowed by blips like the great financial crisis and possibly Coronovirus. But the trends are remarkably resilient. It will take a lot more than 2m EVs per year to reverse course. I figure it'll take 20-25m/year. Or ~5m/year EV Robotaxis. But for now the global ICE fleet keeps growing 40-50m cars per year.

I use EIA (and IEA, BP, etc.) data quite a bit. I pay little attention to their forecasts.

"Starting to plateau" is a long way from "peaking this year".

Oil peak is a lot like 1999's "bricks and mortar are dead". Right trend, wrong timing.

Oil peak is nothing like brick and mortar, more like leaded gasoline, it'll be driven out by political mandate and concern for people's health.

China epitomizes this with their top-down mandates. Car sales have dropped 9% in 2019 (despite Jan 2019 projections claiming 28 million car sales). Based on this, I think 2020 projections of a 2% decline are also not low enough (guessing another 10% decline with the MIC 3 capturing public attention).

I believe neroden projected peak oil demand in 2023, so I don't believe this year is a peak either, but am holding out hope that the real peak could come a year earlier in 2022.

 

[TheTalkingMule]

There are 450k EV buses operating in China, the equivalent of 9M ICE cars displaced. Regardless of passenger EVs having an impact, something is dramatically slowing demand growth. 1.6M projected last year, economy runs hotter than expected and we still only see 750kb/d growth for 2019. That is significant.

Now we have the spectre of 0% Chinese GDP growth plus the global demand impact of coronavirus. To me that's enough to almost neutralize any growth for 2020. That should be enough to trigger our long overdue global recession and we come out the other side in 2024 in an EV dominant world. Demand never recovers to it's 2019 peak. If coronavirus is legit, this is a distinct possibility.

Regardless of peak, investment is over. There are no returns to be made ever again in US fracking production. That should spike pricing like mad once small US operators can't refinance and oil major investors demand straightforward immediate profit return. We focus on EV impact here obviously, but the world is already shifting across all sectors. It's in the trend figures.